News Column

Dangote Flour Mills - Contending With Losses

August 20, 2014

Goddy Egene

When Dangote Industries Limited decided to list its flour subsidiary, Dangote Flour Mills, on the Nigerian Stock Exchange in 2008, investors were excited because they were given the opportunity to be shareholders in the company owned by billionaire business mogul, Alhaji Aliko Dangote. However, the recent performance of the company has left a lot to be desired

True to their expectations, shareholders of the company started reaping dividends from 2009. The last dividend shareholders of the company got was 10 kobo per share, which was for the 2012 financial year.

However, the recent performance of the DFM has shown that shareholders would be without dividend for some time. The company has been recording losses and the latest nine months results to June 30, 2014 indicated that shareholders would wait longer to receive dividends.

Corporate profile DFM commenced its flour milling business in 1999 as a division of Dangote, DFM was incorporated as a public limited company in 2006 and Dangote's entire flour milling business was transferred to DFM. The company was listed on the NSE in February 2008. DFM is involved in the business of flour milling, processing and marketing of branded flour, as well as the production and marketing of pasta and noodles.

DFM has a total installed milling capacity of 7,300MT per day and manufactures its flour and flour products from five strategic locations in West North, South, East and Central Nigeria. However, Tiger Brands Limited, a leading South African fast moving consumer goods company, now controls 70 per cent equity in DFM, while DIL retains 10 per cent.

Dangote Group had explained that the decision to divest was in furtherance of its optimisation and diversification objective and relates specifically to its going forward strategies.

DIL first sold 63.3 per cent stake to Tiger Brands last year, and retained strategic 10 per cent, while President of the Dangote Group, Alhaji Aliko Dangote, also remained the chairman of the board of the company.

Speaking on the acquisition of the 63.3 per cent last year, the Chief Executive Officer of Tiger Brands, Mr. Peter Matlare, said: "We are especially pleased with the successful conclusion of this transaction. We believe it will present growth opportunities for both organisations and be mutually beneficial. Dangote Flour Mills will add significant scale to Tiger Brands' existing Nigerian businesses."

Mr. Thabo Mabe was last June appointed as the substantive Group Chief Executive Officer of the DFM apparently to reposition the fortunes of the company.

Financial performance After its listing DFM reported an impressive performance. For instance, the company 2009, posting a revenue of N61 billion, which improved to N67 billion in 2010. But it declined marginally to N66 billion in 2011 and further to N58 billion in 2012. In terms of profitability, DFM ended 2009 with a profit before tax (PBT) of N5.4 billion, N4.9 billion in 2010 and N759 million in 2011. The company slid into loss position in 2012 with loss before tax of N4billion in 2011.

Profit margin followed the same trend, declining from nine per cent in 2009 to four per cent in 2010, 0.98 per cent in 2011 and negative 3.8 per cent in 2012.

Nine months results DFM recently reported its results for the nine months ended June 30, 2014, indicating that the company is still swimming in losses. Revenue stood at N28.7 billion in 2014, down slightly by 3.7 per cent from N29.8 billion in the corresponding period of 20'13.

Cost of sales fell by 9.1 per cent from N29.6 billion to N26l9 billion, leading to gross profit of N1.75 billion, up 929 per cent from N170 million in 2013. However, distribution, administrative and other expenses rose by 36 per cent from N3.8 billion to N5.2 billion.

But the company made efforts to reduce operational cost and finance cost by 3.2 per cent and 7.2 per cent respectively. This led to an improvement in the loss before tax for the nine months 2014, which stood at N6.3 billion compared with N6.6 billion in 2013. Loss after tax was N4.3trillion, compared to N2.7 trillion.

Analysts' assessment Assessing the results of the DFM, analysts at Dunn Loren Merrifield Limited, said the decline in revenue for the period, gross profit expanded significantly by 928.8 per cent to N1.75billion from N0.17billion.

According to them, their analysis suggests gross profit expansion which mirrored the significant cost savings from lower input costs which also depressed DFM's cost of sales/revenue ratio to 93.90 from 99.43 per cent in the same period of last year. Accordingly, gross margin for the cumulative nine-month period expanded markedly to 6.10 per cent from 0.57 per cent reported in the same period of last year.

Widened operating expenses DFM reported operating expenses of N5.23billion, representing an increase of 35.84 per cent from N3.85billion recorded in the same period of the previous financial year.

On this increase, and the weakness observed in revenue growth, the firm's operating expenses/revenue ratio rose to 18.22 per cent from 12.47 per cent reported in the same period of the previous financial year.

DLM noted that spite of the significant increase recorded in operating expenses, as well as the reported abnormal items related to the write-off of the bad debts that the firm recorded earlier in the year, DFM's operating losses moderated 2.33 per cent to N4.20billion from N4.34billion in 2013.

"We believe the moderate negative impact of increased operating expenses on operating losses in the period is reflective of the strong cost savings from a significantly depressed cost of sales, relative to revenue, that DFM enjoyed in the period. Overhead/revenue ratio in the period declined to 111.14 per cent from 112.83 per cent in the same period of the last financial year, typifying gains from reduced cost of sales and benign cost of sales/revenue ratio, and is further supportive of the decrease recorded in operating losses," DLM said.

Expansion in post-tax loss DFM's profit related to its discontinuing operations fell by 91.30 per cent to N0.17billion in its first nine months financial period. This reversed the decreasing trend already recorded in the firm's operating and pre-tax losses.

Consequently, despite the 3.6 per cent decrease in post-tax loss from continuing operations to N4.49 billion from N4.66billion in 2013 the same period of the previous financial year, overall post-tax loss - which combines post-tax losses from continuing and discontinuing operations - widened significantly, by 59.60 per cent to N4.49billion from N2.71billion in the same period of last year, due to the significant decrease reported in its profit discontinuing operations.

"Our analysis further reveals DFM's net finance costs decreased 7.20 per cent N2.07billion in the review period. We therefore believe the fall in net finance costs, alongside the significant decline in input cost, saved the day for DFM as its bottom line would have fared even much worse without these declines. The major areas left to be addressed in the firm's operations therefore remain weak revenues and high operating expenses," they said.

Hold rating The analysts have put a hold rating on the shares of DFM, saying two major investment theses necessitated their hold rating on the shares. They said: "First, the firm's operating losses are evidently shrinking.

Our belief is that the benign factors that have thus far contributed to this shrinkage in operating losses have a non-zero likelihood of continuing into the medium term, but the firm still has a pressing need to actually grow sales revenue in order benefit to a greater extent from these factors.

We believe persistent shrinkages in operating losses, especially if sizeable enough to feed positively to DFM's bottom line currently in the 'red', constitute a positive catalyst that could herald a positive market disposition towards DFM's shares, consequently leading to a more positive share price reaction compared to current lacklustre price levels."

The analysts explained that they believe DFM's shares, at current levels, trade within the neighbourhood of its lowest historical price levels.

"To us, this implies that the price is unlikely to shrink significantly below current levels as we are of the view that much of the prevailing market pessimism about DFM's prospects has been priced into its shares at current levels.

"Thus, despite DFM's recent and near term business performance, which lowers our estimate of its target price, our view is that its current trading price(N7.50), though not low enough to provide a significant upside relative to our estimated target price - actually limits the firm's downside potential and ensures its shares at current levels are outside our domain of overvaluation. We have revised our valuation, which now assigns a target price of N8.02 per share to DFM. Consequently, we rate the shares hold," they said.

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Source: AllAfrica

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